Talking Points:
- There are two drivers (currencies) for every exchange rate, but that doesn't mean the influence is equally weighted
- Big moves from EUR/USD, AUD/USD and GBP/USD speak to major breakouts or reversal, but opportunity depends on motivation
- We look at equally-weighted indexes for the Dollar, Euro, Pound and Aussie Dollar to establish which is truly moving
See how retail traders are positioning in EUR/USD, AUD/USD and other Dollar-based majors using the DailyFX speculative positioning data on the sentiment page.
The Fed has drawn much of the attention when it comes to global monetary policy. The four quarter-percent rate hikes and recent announced plans for the slow wind down of its massive balance sheet make for a drastically different bearing to the norm. That uniqueness has also translated into dramatic progress for the US Dollar over the past few years. Yet, the balance of influence in shifting. The US central bank's first mover status on normalization is well accounted for via the Dollar and other domestic assets. While there is more untapped potential to be found in the group's efforts moving forward, the untapped potential rests with those policy groups that have yet to reverse course. Far more influential still are those key central banks that still back the extreme accommodation through uncapped easing efforts that have in turn driven the speculative reach so rampant through the system. The anchors to this confidence that borders complacency are the extreme policies from the European Central Bank (ECB) and Bank of Japan (BoJ).
Both central banks are due to weigh in on their respective policy bearings today, and each represents a deep potential threat to the unstable financial system. Between the BoJ is least likely to alter its policy course. The chances of an actual change to the benchmark rate or the ongoing quantitative easing (QE) program are extremely unlikely. The Japanese policy authority has generally used surprise to announce most of it significant changes over recent years, but there is a skew with the current bearing. More easing would likely find the speculative rank unimpressed and the economic impact will likely remain unchanged - the amount of stimulus already floating in the Japanese financial system is extraordinary. If there is a shift, it is more likely to be a warning of normalization through the near future. That could readily lift the Japanese Yen; which would be a remarkable catalyst for pairs like GBP/JPY, AUD/JPY, NZD/JPY and others following a steady climb from these crosses.
For the ECB policy decision at 11:45 GMT, there is a significantly higher chance that the group offers a material change in its policy bearings. It is difficult to miss President Draghi and company's efforts to test the waters for normalizing after having pursued extreme easing for so many years. Yet, the market has not taken very kindly to insinuation that the punch bowl could be pulled back and the ECB has acted like a frightened rabbit that bolts to its hole with each movement in the markets following such efforts. Given the Euro's remarkable climb - especially EUR/USD - a considerable amount of premium behind an eventual shift in Eurozone policy has been accounted for. To carry the next leg, a definitive tightening plan will need to be seen. As we keep eye on the Yen and Euro pairs, it is important to remember that there is further a market-wide influence from this collective central bank read. Speculative appetite since the 2011 has more or less been heavily dependent on the speculative reach and backstop provided by these extremely accommodative groups. What should we expect from the Euro, Yen and global risk trends following these important ECB and BoJ rate decisions? That is the focus in today's Strategy Video.
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